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Key Topics
- The major factors contributing shortage of butter and its impact on quantity and price equilibrium
- Determinants of price elasticity of demand and the demand for butter is elastic or inelastic
- If the price of the baked goods in inelastic then effect on the customer expenditure
- The Effect of butter shortage in two other markets
- References
The major factors contributing shortage of butter and its impact on quantity and price equilibrium
It has been highlighted in the case study that there is a huge shortage of butter in the recent times that is the reason a lot of bakeries are switching to the French butter. It has been also assumed that the shortage of butter may be due to the following reasons such as, the changing trend as there are a lot of consumers who are opting for full cream milk rather than the skimmed milk. Referring to the diagram of demand and supply it can be clearly observed how the shortage of butter has affected the price and demand. The ceteris paribus suggests that higher the price of a commodity the lower quantity of that specific product is demanded. On the other hand, the ceteris paribus in the economic field is often used when the argument is made on the basis of effect and cause. The main factors that are contributing to the shortage of butter have been already mentioned but there are also some of the additional reasons such as The demand for butter in the current times have been increasing at an alarming rate, and the producers of dairy haven't been able to keep up with the mark products (Hochman and et. al, 2014). It has been observed when a shortage of product takes place when the quantity of the said product is greater than what is supplied. In the above-mentioned situation, the customer would not be able to buy as much product as they wish to buy. It can be said that if the price of butter increases at an alarming rate in the future also then the demand for the said product will diminish at some point in time. However, if the quantity of butter is increased in the future then it can satisfy the other customers and as a result, the equilibrium will be reached. When a price is below the equilibrium which can be observed in the diagram that causes a shortage and if the price is above equilibrium it is excess/surplus.
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Determinants of price elasticity of demand and the demand for butter is elastic or inelastic
Using the determinants of price elasticity of demand it can be said that the demand for butter is elastic in nature as it has been closely observed that there is a shortage of butter plus there is a high increase in price. The increase in the price of the butter has been calculated more than double because the Australian butter in the year 2017 was $100 but in the present year, it is more than $240. Hence, in some of the very well-known bakeries are also using margarine instead of butter as cannot afford to lose their customers and business. The National Bakery Industry Association President said that they don't want this as it will impact the nutritional value and taste of the consumers to a great extent. In this particular case, it has been noticed that the change in demand is totally corresponding to the change in the price of the butter. Furthermore, the degree of responsiveness a demand curve has with regards to the price. It has been also clearly witnessed that when the price of butter increased then the demand for butter also dropped to some extent as consumption of pure butter has been substituted with the margarine then the curve is also elastic in nature (Fan and Hyndman, 2011). The elasticity of butter is greater than 1 so the curve is also elastic. The price elasticity of demand: Firstly, there is a substitute for butter that is margarine. Secondly, there is a large number customer across the globe also who uses butter It has been also witnessed that when the price of butter has increased it is only used in the important areas such baking cakes, pastries, and etcetera. Whenever the price of butter will drop then butter will be devoted to the other uses by the consumers.
If the price of the baked goods in inelastic then effect on the customer expenditure
In the specific case study, it is assumed that the demand for the baked goods is elastic in nature. Furthermore, inelastic is a term that is completely used when the quantity demanded a particular product remains unaffected even there is a small change in the price with regards to the product. The price inelasticity also suggests that the buying habits of the customers remain the same even if the price goes up or goes down as they consider these types of goods as a part of their necessities. It has been closely observed in the case study that the shortage of butter is forcing the makers of biscuits, cakes, and pies to increase the prices. The customers are also warned that the price of above-mentioned goods can increase more before the Christmas. There is a shortage of butter plus there is also a high increase that can be expected in the bakery goods following are some of the assumptions which can be considered with regards to the impact that will be caused to the total expenditure of the consumers. Firstly, it can be assumed that when the demand by the consumers is elastic in nature then the rise in the price of the bakery goods will lead to a rise in total expenditure on it. Furthermore, when the demand is elastic in nature than the total expenditure and price almost move in the same direction. Secondly, as the bakery goods is an absolute necessity for the consumers especially during the time of Christmas no matter what they will spend some amount of money on the baked goods even the price is high. Thirdly, there will be increased in demand among the consumers even if the prices rise so they are also will to pay more, as a result, the inflation will be pushed up and it will be also quite profitable for selling the goods abroad (Rios, McConnell and Brue, 2013).
The Effect of butter shortage in two other markets
There are four types of market structures with regards to the competition one of the markets has been already highlighted in the case study that is purely competitive market other two markets will be discussed in this segment. Firstly, in the imperfectly competitive market will be affected by the shortage of butter in the following ways where the equilibrium results are also quite different: The sellers can influence their potential buyers with regards to the market prices of their outputs (Moon, 2013). In case of the shortage of butter, the monopolistic competition is not at all applicable as butter can be substituted and also there a large number of sellers with regards to the butter in the marketplace. The selling of butter is done in the oligopoly market as the sellers of the market only decide the price of the butter which later on affects the sales. There is an interdependent type of relationship between the demand and supply with regards to the field of economics. The equilibrium point the demand and supply diagram is represented by the interaction upward sloping supply line and the downward sloping demand line. When the shortage happens in the imperfectly competitive market then the equilibrium at a given price is quite unfit for the demand relationship and also for the current supply. Secondly, to be more precise in an imperfectly competitive market a shortage of supply with regards to the butter will not at the result in shifting of the equilibrium point like it happened in case of the perfectly competitive market. It will result in lower price due to the limited supply of butter. When the supply shifts then the equilibrium point will also shift with regards to the supply curve downward or upward. A decrease in the supply of the butter will give rise to the demand and price. It can be concluded that the supply and demand both affect the equilibrium to a great extent. Balancing the new supply or demand a correct price point and the corresponding volume is required.
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Fan, S., and Hyndman, R. J. (2011). The price elasticity of electricity demand in South Australia. Energy Policy, 39(6), 3709-3719.
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Hochman, G., Rajagopal, D., Timilsina, G., and Zilberman, D. (2014). Quantifying the causes of the global food commodity price crisis. Biomass and Bioenergy, 68, 106-114.
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Moon, M. A. (2013). Demand and supply integration: The key to world-class demand forecasting. New York: FT Press.
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Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. New York: McGraw-Hill.
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